Why Investors Shouldn't Be Surprised By China Gold International Resources Corp. Ltd.'s (TSE:CGG) 26% Share Price Surge

China Gold International Resources Corp. Ltd. (TSE:CGG) shares have continued their recent momentum with a 26% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 36% in the last year.

Following the firm bounce in price, you could be forgiven for thinking China Gold International Resources is a stock not worth researching with a price-to-sales ratios (or "P/S") of 3.8x, considering almost half the companies in Canada's Metals and Mining industry have P/S ratios below 2.8x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

See our latest analysis for China Gold International Resources

How Has China Gold International Resources Performed Recently?

China Gold International Resources hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Want the full picture on analyst estimates for the company? Then our free report on China Gold International Resources will help you uncover what's on the horizon.

How Is China Gold International Resources' Revenue Growth Trending?

There's an inherent assumption that a company should outperform the industry for P/S ratios like China Gold International Resources' to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 17%. The last three years don't look nice either as the company has shrunk revenue by 51% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Turning to the outlook, the next year should generate growth of 80% as estimated by the three analysts watching the company. That's shaping up to be materially higher than the 25% growth forecast for the broader industry.

With this in mind, it's not hard to understand why China Gold International Resources' P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What Does China Gold International Resources' P/S Mean For Investors?

China Gold International Resources' P/S is on the rise since its shares have risen strongly. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that China Gold International Resources maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Metals and Mining industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for China Gold International Resources with six simple checks on some of these key factors.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.